Supplemental Instruction Finance 301 12/4/08

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Supplemental Instruction
Finance 301
12/4/08
1. What is the payback period?
2. A project costs 60,000 and its expected net cash inflows are 12,000 for the first 3 years, and
15,000 for the next 4 years. Its WACC is 12%. What is the project’s payback?
0
1
2
3
4
5
6
7
3. Name the advantages and disadvantages of using the payback period.
4. What is the difference between payback period and discounted payback period?
5. What is the discounted payback for a project that costs $45,000 and then has cash flows of
$12,000 for 3 years, and cash flows of 15,000 for 4 years, with a WACC of 12%?
6. When do you use MIRR instead of IRR? What is the decision rule for IRR?
7. A firm with a 12% WACC is evaluating 2 projects for this year’s capital budget. After tax cash
flows, including depreciation are as follows:
Time
Project A
Project B
0
-5,000
-18,000
1
2,000
5,600
2
2,000
5,600
3
2,000
5,600
4
2,000
5,600
5
2,000
5,600
Calculate NPV and IRR for each project. Which would you accept if the projects are independent?
Which would you accept if the projects are mutually exclusive?
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